PC nection(US:CNXN)2024-05-01 20:11PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents PC Connection, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flows, for Q1 2024 and Q4 2023 Condensed Consolidated Balance Sheets | Metric | March 31, 2024 (in thousands) | December 31, 2023 (in thousands) | | :------------------------------------ | :---------------------------- | :----------------------------- | | Total Assets | $1,161,065 | $1,188,381 | | Total Liabilities | $308,393 | $347,614 | | Total Stockholders' Equity | $852,672 | $840,767 | | Cash and cash equivalents | $147,579 | $144,954 | | Short-term investments | $204,374 | $152,232 | | Accounts receivable, net | $527,259 | $606,834 | | Accounts payable | $218,801 | $263,682 | Condensed Consolidated Statements of Income | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net sales | $632,025 | $727,545 | | Cost of sales | $513,953 | $605,249 | | Gross profit | $118,072 | $122,296 | | Selling, general and administrative expenses | $104,608 | $103,282 | | Restructuring and other charges | $— | $897 | | Income from operations | $13,464 | $18,117 | | Interest income, net | $4,567 | $1,286 | | Income before taxes | $18,031 | $19,403 | | Income tax provision | $(4,877) | $(5,205) | | Net income | $13,154 | $14,198 | | Basic Earnings per common share | $0.50 | $0.54 | | Diluted Earnings per common share | $0.50 | $0.54 | - Net sales decreased by 13.1% year-over-year, from $727,545 thousand in Q1 2023 to $632,025 thousand in Q1 202480 - Gross profit decreased by 3.5% year-over-year, from $122,296 thousand in Q1 2023 to $118,072 thousand in Q1 202480 Condensed Consolidated Statements of Other Comprehensive Income | Metric | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :--------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income | $13,154 | $14,198 | | Unrealized losses on available-for-sale investments, net of tax | $(143) | $— | | Comprehensive income | $13,011 | $14,198 | - The company reported unrealized losses on available-for-sale investments of $143 thousand (net of tax) in Q1 2024, compared to no such losses in Q1 202381 Condensed Consolidated Statements of Stockholders' Equity | Item | Balance - December 31, 2023 (in thousands) | Stock-based compensation expense (in thousands) | Dividend declaration (in thousands) | Net income (in thousands) | Other comprehensive loss, net of tax (in thousands) | Balance - March 31, 2024 (in thousands) | | :----------------------------------- | :--------------------------------------- | :------------------------------------ | :---------------------------------- | :------------------------ | :-------------------------------------------------- | :-------------------------------------- | | Common Shares | 29,262 | — | — | — | — | 29,271 | | Stock Amount | $293 | — | — | — | — | $293 | | Additional Paid-In Capital | $130,878 | $1,949 | — | — | — | $132,596 | | Retained Earnings | $760,898 | — | $(2,636) | $13,154 | — | $771,416 | | Accumulated Other Comprehensive (Loss) Income | $81 | — | — | — | $(143) | $(62) | | Treasury Shares | (2,902) | — | — | — | — | (2,905) | | Shares Amount | $(51,383) | — | — | — | — | $(51,571) | | Total | $840,767 | $1,949 | $(2,636) | $13,154 | $(143) | $852,672 | - Total stockholders' equity increased from $840,767 thousand at December 31, 2023, to $852,672 thousand at March 31, 202489 Condensed Consolidated Statements of Cash Flows | Cash Flow Activity | Three Months Ended March 31, 2024 (in thousands) | Three Months Ended March 31, 2023 (in thousands) | | :------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by operating activities | $57,285 | $19,505 | | Net cash used in investing activities | $(51,607) | $(1,882) | | Net cash used in financing activities | $(3,053) | $(5,743) | | Increase in cash and cash equivalents | $2,625 | $11,880 | | Cash and cash equivalents, end of period | $147,579 | $134,810 | - Net cash provided by operating activities significantly increased to $57,285 thousand in Q1 2024 from $19,505 thousand in Q1 2023, primarily due to a decrease in accounts receivable22102 - Net cash used in investing activities increased substantially to $(51,607) thousand in Q1 2024, mainly due to purchases of short-term investments22199 Notes to Unaudited Condensed Consolidated Financial Statements - The financial statements are prepared in accordance with U.S. GAAP and consistent with the accounting policies in the Company's 2023 Annual Report on Form 10-K15 - Interest income, net, on cash equivalents and short-term investments increased to $4,565 thousand for Q1 2024, up from $1,308 thousand for Q1 202318 - No restructuring and other charges were recorded for Q1 2024, compared to $897 thousand in Q1 2023 related to workforce reduction3536 - Contract liabilities increased to $8,453 thousand as of March 31, 2024, from $4,206 thousand as of December 31, 202328 - All short-term investments are classified as available-for-sale and recorded at fair value using Level 1 inputs943041 - Basic and diluted earnings per share both decreased to $0.50 for Q1 2024 from $0.54 for Q1 202344 - The company's operations are organized into three segments: Enterprise Solutions, Business Solutions, and Public Sector Solutions58 - The Public Sector Solutions segment experienced the largest decrease in net sales, down 33.4% year-over-year60163 - The company has a $50,000 thousand credit facility available until March 31, 2025, with no outstanding borrowings as of March 31, 20246469200 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2024 financial performance, condition, liquidity, capital resources, and critical accounting policies CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS - The report contains forward-looking statements regarding future financial results, business plans, liabilities, competition, and macroeconomic impacts70 - These statements are based on current views and assumptions but are subject to known and unknown risks and uncertainties70 - Key risks include substantial competition, price competition, loss of major vendors, IT virtualization, service interruptions, increased shipping costs, loss of key personnel, cyberattacks, and macroeconomic factors like inflation and changing interest rates65 OVERVIEW - PC Connection, Inc. is a Fortune 1000 Global Solutions Provider offering IT solutions and services through its Enterprise, Business, and Public Sector Solutions segments143144145 - The company mitigates direct sales efforts by manufacturers by providing comprehensive, product-neutral IT solutions and higher-margin service offerings through its Technology Solutions Organization (TSO)146 - Primary challenges include increasing product/service revenues and gross margin, recruiting/retaining sales and technical support personnel, and controlling SG&A expenses while investing in IT systems147 RESULTS OF OPERATIONS Key Financial Performance Indicators (as % of Net Sales) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $632.0 million | $727.5 million | | Gross margin | 18.7% | 16.8% | | Selling, general and administrative expenses | 16.6% | 14.2% | | Income from operations | 2.1% | 2.5% | - Net sales decreased by $95.5 million (13.1%) year-over-year in Q1 2024, primarily due to decreases in notebooks/mobility, software, and net/com products137 - Gross profit decreased by $4.2 million (3.5%), but gross margin increased to 18.7% from 16.8%, driven by an increase in software sales recognized on a net basis137 Net Sales and Gross Profit by Segment (in millions) | Segment | Net Sales Q1 2024 | Net Sales Q1 2023 | $ Change | % Change | Gross Profit Q1 2024 | Gross Profit Q1 2023 | $ Change | % Change | | :-------------------- | :---------------- | :---------------- | :------- | :------- | :------------------- | :------------------- | :------- | :------- | | Enterprise Solutions | $282.6 | $313.9 | $(31.3) | (10.0)% | $42.7 | $42.1 | $0.6 | 1.6% | | Business Solutions | $255.9 | $273.1 | $(17.2) | (6.3)% | $60.4 | $59.9 | $0.5 | 0.8% | | Public Sector Solutions | $93.5 | $140.5 | $(47.0) | (33.4)% | $15.0 | $20.3 | $(5.3) | (26.3)% | | Total | $632.0 | $727.5 | $(95.5) | (13.1)% | $118.1 | $122.3 | $(4.2) | (3.5)% | SG&A Expenses (in millions) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :----------------------------------- | :-------------------------------- | :-------------------------------- | | Personnel costs | $78.5 | $79.2 | | Advertising | $7.4 | $6.6 | | Service contracts/subscriptions | $6.0 | $5.2 | | Professional fees | $3.4 | $3.8 | | Depreciation and amortization | $3.3 | $3.1 | | Facilities operations | $1.8 | $2.2 | | Credit card fees | $1.6 | $1.5 | | Other | $2.6 | $1.7 | | Total SG&A expense | $104.6 | $103.3 | | As a percentage of net sales | 16.6% | 14.2% | - Income from operations decreased to $13.5 million in Q1 2024 from $18.1 million in Q1 2023, primarily due to lower net sales and gross profit178 - Interest income, net, increased significantly to $4.6 million in Q1 2024 from $1.3 million in Q1 2023, driven by higher cash equivalent balances and interest rates179 - Net income decreased to $13.2 million in Q1 2024 from $14.2 million in Q1 2023168 Liquidity and Capital Resources - Primary liquidity sources are internally generated funds from operations, short-term investments, and borrowings under the credit facility169 - The company expects to have sufficient funds for the next twelve months and beyond, with $147.6 million in cash and cash equivalents, $204.4 million in short-term investments, and a $50.0 million available credit facility as of March 31, 2024170171172181 Summary of Sources and Uses of Cash (in millions) | Cash Flow Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :------------------------------------------ | :-------------------------------- | :-------------------------------- | | Net cash provided by operating activities | $57.3 | $19.5 | | Net cash used in investing activities | $(51.6) | $(1.9) | | Net cash used in financing activities | $(3.1) | $(5.7) | | Increase in cash and cash equivalents | $2.6 | $11.9 | - The cash conversion cycle decreased to 53 days for Q1 2024, down from 65 days for Q1 2023, primarily due to improved collections (DSO decreased to 70 days from 71 days) and inventory management (DIO decreased to 22 days from 30 days)103104196198 - The $50.0 million credit facility, collateralized by accounts receivable, is available until March 2025, with no outstanding borrowings as of March 31, 2024188200 - The company was in compliance with all financial covenants as of March 31, 2024, including minimum consolidated net worth ($852.7 million actual vs. $609.6 million required) and funded debt ratio (0.0 to 1.0 actual vs. 2.0 to 1.0 maximum)64110203 APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES - The company's critical accounting policies and estimates have not materially changed from those discussed in its Annual Report on Form 10-K for the year ended December 31, 2023204 RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS - Information on recently issued financial accounting standards is detailed in Note 1, 'Basis of Presentation,' within the Notes to Unaudited Condensed Consolidated Financial Statements189 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Reports no material changes to market risks since December 31, 2023, referring to the Annual Report on Form 10-K - No material changes related to the company's market risks have occurred since December 31, 2023206 - For a comprehensive description of market risks, refer to Item 7A. 'Quantitative and Qualitative Disclosures About Market Risk' in the Annual Report on Form 10-K for the year ended December 31, 2023206 ITEM 4. Controls and Procedures Details evaluation of disclosure controls and procedures, confirming effectiveness and no material changes in internal control Disclosure Controls and Procedures - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2024207 - It was concluded that the disclosure controls and procedures were effective at the reasonable assurance level207 Changes in Internal Control over Financial Reporting - There were no changes in internal control over financial reporting during the fiscal quarter ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting116 PART II OTHER INFORMATION ITEM 1. Legal Proceedings This section incorporates legal proceedings information by reference, noting no expected material adverse effect - Information related to legal proceedings is incorporated by reference from Note 8 - 'Commitments and Contingencies' in the Notes to Unaudited Condensed Consolidated Financial Statements209 ITEM 1A. Risk Factors Refers to the Annual Report on Form 10-K for comprehensive risk factors that could materially affect the business - Readers should carefully consider Item 1A. 'Risk Factors' in the Annual Report on Form 10-K for the year ended December 31, 2023, for factors that could materially affect the business, financial position, and results of operations117 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds Details the stock repurchase program, shares purchased, remaining authorization, and confirms no D&O trading Common Stock Repurchase Program Activity (in thousands, except per share data) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value that May Yet Be Under the Plans or Programs (in millions) | | :----------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------- | | 01/01/24-01/31/24 | — | — | — | $32.3 | | 02/01/24-02/29/24 | — | — | — | $32.3 | | 03/01/24-03/31/24 | 2,898 | $64.40 | 2,898 | $32.1 | | Total | 2,898 | $64.40 | 2,898 | | - The Board of Directors approved an increase of $40.0 million to the repurchase program on May 1, 2024, bringing the aggregate authorized amount to $120.0 million118 Director and Officer Trading Arrangements - No directors or officers adopted or terminated a Rule 10b5-1 trading agreement or a non-Rule 10b5-1 trading agreement during the first quarter of 2024128222 ITEM 5. Other Information This section serves as a placeholder and contains no specific content ITEM 6. Exhibits Lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents and XBRL data - Exhibits include Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, Director Compensation and Executive Bonus Plan, Section 302 and 906 certifications, and various Inline XBRL Taxonomy documents120121122129130131212213214224225226227228229 - The financial statements and notes are attached as Exhibit 101, formatted in XBRL (Extensible Business Reporting Language)229 SIGNATURES Contains the official signatures of the company's authorized officers, confirming report submission - The report was signed by Thomas C. Baker, Senior Vice President, Chief Financial Officer and Treasurer, and Timothy J. McGrath, President and Chief Executive Officer, on May 1, 2024124216217218